Mathematics for FinanceMTP June 24 Series IIIQuestion 1596 of 512
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Assuming, that discount rate is 7%\displaystyle 7\% per annum, how much would you pay to receive Rs.50\displaystyle 50, growing at 5%\displaystyle 5\%, annually, forever.

Options

A2500\displaystyle 2500
B3000\displaystyle 3000
C3500\displaystyle 3500
D4000\displaystyle 4000
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Correct Answer

✅ Option a — 2500\displaystyle 2500

All Options:

  • A2500\displaystyle 2500
  • B3000\displaystyle 3000
  • C3500\displaystyle 3500
  • D4000\displaystyle 4000

Detailed Solution & Explanation

The present value (PV\displaystyle PV) of a growing perpetuity is: PV=Ar−gPV = \frac{A}{r - g} Given: * First cash flow (A\displaystyle A) = 50\displaystyle 50 * Discount rate (r\displaystyle r) = 7%\displaystyle 7\% p.a. = 0.07\displaystyle 0.07 * Growth rate (g\displaystyle g) = 5%\displaystyle 5\% p.a. = 0.05\displaystyle 0.05 Substituting the values: PV=500.07−0.05=500.02=2,500PV = \frac{50}{0.07 - 0.05} = \frac{50}{0.02} = 2,500 Hence, **Option A** is the correct answer.

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